Cyprus euro controls may last years as Sarris vows ‘weeks’

Cyprus is on the verge of an unprecedented financial experiment: imposing controls on money transfers in an economy that doesn’t have its own currency.

Countries from Argentina to Iceland have used similar measures in the past to defend against devaluation. Being part of the euro zone may make it harder for the Mediterranean island to enforce restrictions, as any money that leaves the banking system can be taken out of Cyprus without losing value.

That also may make it more difficult to meet the goal set yesterday by Finance Minister Michael Sarris to lift any controls in “a matter of weeks.” When economies in Asia and Latin America tried to stem the outflow of money in the 1980s and 1990s, they ended up keeping the measures in effect for six months to two years. Iceland, another island nation with an outsize banking system, still has capital controls five years after its banks collapsed in 2008.

“Thanks to political mismanagement, we now have a first: capital controls in the euro zone,” said Nicolas Veron, a senior fellow at Bruegel in Brussels and a visiting fellow at the Peterson Institute for International Economics in Washington. “How long is temporary? It could turn out like Iceland, extending to many years.”

Russian Deposits

Cyprus today announced controls it will begin implementing when banks reopen tomorrow. The country’s leaders are seeking to prevent the flight of money from island lenders, which have been closed for almost two weeks. Russian holdings in Cypriot banks are estimated by Moody’s Investors Service at $31 billion, or about a quarter of total deposits.

The government limited daily withdrawals to 300 euros ($383) and restricted transfers overseas, according to a decree the central bank said will remain valid for four days. It also banned check cashing and terminating time deposits. Banks will open at noon tomorrow, the central bank said.

Yiangos Dimitriou, a central bank spokesman, told state-run CyBC television that the effectiveness of the measures will be evaluated daily.

“They’re going to need some serious controls to make sure the money doesn’t leave the country,” said Nikolaos Panigirtzoglou, a London-based strategist at JPMorgan Chase & Co. “Otherwise, I can’t see how any of this money with a high propensity to leave will stay voluntarily.”